Having a sudden unexpected, yet expected expense can ruin your budget for the month and possibly months ahead. Despite the fact that my birthday comes yearly, I always forget about having to pay for the renewing of my car registration. For many years it would blow my budget for that month and the next. Once I started an emergency fund that stopped but I hated having to reach into it because I forgot about the expense. Just because you forgot about the expense does not make it an emergency, and that is not what an emergency fund should be used for. After some searching, I ran into a series of videos by JenPlans where she discusses her budget set-up and sinking funds.
Sinking Funds – What are they?
A sinking fund is money that is set aside (separate from your savings account or emergency fund) that is used to pay for various types of unexpected and expected but forgotten expenses. There are a number of reasons to use sinking funds from vacation, home remodeling, christmas, birthday gifts, car issues, car registration, etc. The average sinking fund falls into three categories (despite what you name it) large purchases, overlooked expenses, and unexpected events. Starting a sinking fund and maintaining a sinking fund can be as easy or complicated as you make it.
Make a list of the expenses for which you want to make a sinking fund.
Some common sinking funds include: Christmas, Birthday/Gifts, Home and Car Maintenance, Clothing, Vacation, Car Registration, Car Insurance, and many more.
Determine where to store your sinking fund.
Money for the sinking fund can be saved in a regular savings account, or in a checking account with instant access and possibly a debit card. You can store the total amount for all sinking funds in one account as long as you remember to keep track of the money in each category.
Building a Sinking Fund
Sinking funds can be established with unexpected money such as a work bonus or income tax refund. It can be filled incrementally throughout the year. If I wanted to make sure I had the $200 every August to pay for my car registration, I would start with saving $16.67 monthly from September until the next August (12 months). By the end of that time period, I would have the necessary $200 needed to pay the registration.
Apps to Help Manage Sinking Funds
There are multiple apps that can be used to help manage your sinking funds. Personally I use a mixture of the Budget Calendar (physical planner) and my Simple account. Other budgeting apps to try include: Everydollar, You Need a Budget, Pennies, GoodBudget, Mvelopes and probably many others.
Sinking funds were honestly a lifesaver for me back when my income was minimal and continues to help me better control my budget. If you have any questions regarding sinking funds. Feel free to comment below.